The Quantification of Operational Risk
38 Pages Posted: 30 Dec 2003
Date Written: November 2003
We examine the quantification of operational risk for banks. We adopt a financial economics approach and interpret operational risk management as a means of optimizing the profitability of an institution along its value chain. We start by defining operational risk and then propose a framework to model risk mitigation through the bank's value chain over time. Using analytical and numerical methods, we obtain answers concerning capital allocation, network stability, risk figures, and diversification issues. Interpreting the results shows that the usual intuition gained from market and credit risk does not apply to the quantification of operational risk.
Keywords: Operational Risk Management, Stochastic Systems, Diversification, Profitability
JEL Classification: C19, C69, G18, G21
Suggested Citation: Suggested Citation